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Liability of Corporate Individuals for Labor Code Violations under the new Fair Day’s Pay Act

A strong reason for establishing a corporation or limited liability company is to attain protection against personal liability as the result of the company’s debts or liabilities. While it is traditionally true that the corporate form provides direct protection for owners, directors and officers, California courts are increasingly holding owners liable for labor code violations.

This trend led to the enactment of California’s so-called “A Fair Day’s Pay Act” on Jan. 1, 2016, which formalized and extended the case law even further.

Labor Code Section 558.1 now holds that “any owner, director, officer, or managing agent of the employer” that is “acting on behalf of an employer” who violates, or causes certain wage and hour laws to be violated, may be held liable as the employer for such violation.

This expanded liability encompasses most of the common wage and hour violations, such as overtime, minimum wage, pay stub violations, meal and rest periods, and failure to reimburse business expenses, as well as waiting time penalties. A “managing agent” under Civil Code 3294 is one who exercises substantial discretionary authority over decisions that ultimately determine corporate policy. In most cases, personal liability would not reach payroll managers and may not reach HR managers. From the employee/plaintiff’s point of view, individual defendants are chosen for their deep pockets or for their control of the litigation.

Because of this, owners (including directors, officers and managing agents) of corporate entities must be cognizant that if they are wrongly directing employees in regards to work schedules, wages etc., that they may be unknowingly creating liability for themselves as individuals. If possible, owners etc., should train and rely upon its work supervisors and HR staff to supervise wage/hour compliance. This new liability risk should provide even more incentive for businesses to have strong employment policies in place and to review their labor and employment practices on an annual basis to avoid liability in the first place.